Today, in much of Latin America, the dominant economic
paradigm is neo-liberalism. This particular line of thinking is a reaction
to the preceding paradigm known as 'Import Substitution.' Previously, the
perceived problem was the dependency of Latin Americans upon the unpredictable
demands of the First and Second World nations. For example, countries that
were overly dependent upon the export of commodities such as tin and copper have
found themselves in dire straits due to drops in prices and/or demand but were
nevertheless dependent on imported manufactured goods such as automobiles.
During the era of Import Substitution, many countries applied their national
resources to develop core industries such as automobile manufacturing, which
would reduce their dependency upon imports as well as drive their own internal
economies.

Import Substitution came under fire for leading
many Latin American countries into debt crises, as the money borrowed to start
these Import Substitution industries could not be repaid from the revenues from
these industries. The neo-liberals held that the problem was that there
was too much state intervention in developing national industries that were
inefficient and non-competitive and the required overspending led to runaway
inflation.

The neo-liberal solution to these problems
attempts to address the philosophical roots. The actual steps were somewhat different
across countries, since what is needed and what is possible depends on many
situations (e.g. the amount of the external debt, the nature and state of the
economy, the principal assets of the country, etc) and many players (e.g. government officials, unions, the lending
banks, academic theoreticians, the International Monetary Fund, the World Bank,
and even the electorate). Usually, they involve these two aspects ---

Stabilization --- Stabilization refers to the
immediate task of curbing inflation (which was as high as several thousand
percent per year in some Latin American countries), and is achieved by several measures: reducing public
spending, raising interest rates, strengthening the national currency and
imposing wage and price controls.

Structural adjustment --- The economy is
restructured by removing state intervention in the national economy and
letting free-market mechanisms determine the optimal allocation of
resources. This is achieved by several measures: the removal of labor
and business regulations to encourage economic growth, the reduction or
removal of protective tariffs to promote free trade and the privatization of
state-owned industries (such as telecommunications) to raise cash as well as
inject competition.

This is not the place for us to evaluate the
success/failure of neo-liberalism as a whole. Still, it should be clear
that structural adjustment implies a radical transformation of the economy
achieved within a short time frame, which is sometimes called a shock. The
re-allocation of resources means that some sectors of the economy will shrink
even as others expand. Thus, in the post-NAFTA era, the traditional maize
growers in Mexico found themselves unable to compete in the open market against
the large mechanized North American farms which are several times more productive;
correspondingly, the Latin American countries were booming in maquiladoras
because they had an abundant supply of cheap labor; or, as Ross Perot chooses to
describe it, there was the 'giant sucking sound' of North American manufacturing
jobs heading south.

Under any re-allocation
process for a complex economy, there is unlikely to be a Pareto-optimal solution
in which everybody does no worse than before. Rather, in all likelihood,
some people will do better and other people will fare worse than before.
When an economic shock is applied, the quickest and biggest impact appears in
the form of rising unemployment, as when governments reduces their sizes and
expenditures, privatized firms streamline their operations, private companies
replacing union workers with non-union people, companies going out of business
because of foreign competition, etc. Job elimination simply happens a lot
faster than job creation.

We will now cite some survey data from the
1999-2000 TGI Latina study. This is a consumer survey of 46,244
persons between the ages of 12 and 64 years old in seven Latin American
countries: Argentina, Brazil, Chile, Colombia, Mexico, Peru and Venezuela.
From this study, the employment statistics are: 40% of the respondents
have full-time employment (that is, working 30 hours or more per week), 6% are unemployed and currently looking for work,
1.4% are unemployed but are currently not looking for work. The following
table breaks these numbers out by demographic characteristics.

Sex/age
Male 12-19 years
Male 20-24 years
Male 25-34 years
Male 35-44 years
Male 45-54 years
Male 55-64 years

Female 12-19 years
Female 20-24 years
Female 25-34 years
Female 35-44 years
Female 45-54 years
Female 55-64 years

15%
54%
76%
81%
73%
50%

5%
26%
32%
36%
29%
15%

4%
10%
7%
5%
5%
4%

4%
12%
9%
5%
3%
2%

1.0%
0.9%
1.3%
1.2%
1.0%
1.5%

2.2%
2.3%
1.9%
1.4%
1.8%
0.7%

TOTAL

40%

6%

1.4%

(source: TGI Latina)

There is a gender gap in labor
participation in Latin America. More men are employed than women; for
example, 81% of men 35-44 years old are working full time, versus 36% of women
in the same age bracket. Conversely, more women than men are unable to
find jobs; for example, 10% of men 20-24 years old cannot find jobs, versus 12%
of women in the same age bracket.

Labor participation is also an
increasing function of socio-economic level. The more affluent people are
more likely to be working, and the less affluent are more likely to be
unemployed. This is rather unfortunate, as the poor are more vulnerable
because they are less likely to possess the means (such as savings, credit and
loan collaterals) to smooth out the effects of unemployment and have to endure
cuts in consumption that have long-term deleterious effects.

Here, we must point out that there are number of
definitional issues related to the notions of employment and unemployment.

For us, 'full-time employed' means working
thirty hours or more a week. This definition makes no distinction
between a contracted union job paying guaranteed steady wages versus a
temporary day-to-day job from which one can be fired at will. It
covers well-educated, white-collar professionals working for high-paying
multinational corporations as well as unskilled laborers working for
below-subsistence wages in the informal sector.

'Full-time employed' includes also various
forms of underemployment, such as full-time government employees who have
nothing to do, are not paid enough and need to have additional jobs (such as
driving taxis).

Under 'unemployed' are categories such as
housewives (ama de casa), students and retired persons.
Housework is a gray area in that it is not considered work when the
housewife performs it but it is considered work when a domestic worker is
hired to perform the same duties.

An unemployed person faces an uncertain
future. The loss of that income erodes consumer confidence. In the
following table, we show the consumer confidence index by the different
employment/unemployment categories. There is clearly significantly less
confidence among the unemployed persons.

Consumer Confidence

% Full-time employed -
agree

% Unemployed,
looking for work -
agree

% Unemployed,
not looking for work -
agree

Current condition compared to 1 year ago
Better than 1 year ago
The same as 1 year ago
Worse than 1 year ago

Current condition compared to 1 year from now
Better 1 year from now
The same as 1 year from now
Worse 1 year from now

65%
22%
12%

72%
17%
11%

65%
21%
14%

(source: TGI Latina)

As we have shown in a previous note (Consumer Confidence and Spending Behavior),
consumer confidence is positively correlated with
consumption. For the poor, normal consumption is already close to the
minimal subsistence levels. Further reduction in food consumption may lead
to higher levels of malnutrition, which may cause serious damage to long-term
health and earnings potentials. Reduction in schooling, either because
they could not afford the direct and indirect costs or because the children must
enter the labor force to earn money too, will mean lesser opportunities later in
life.

While the economic, social and political effects are
somewhat understood, the psychological injuries of unemployment are often taken for
granted or
hidden from public view because they are too embarrassing to discuss. In the following
table, we show a list of attitudinal statements tabulated by the
employment/unemployment categories. What do we see for the jobless
ones? Feelings of anxiety, isolation, disappointment, unhappiness,
inadequacy, helplessness, ...

Statement

% Full-time employed -
completely agree

% Unemployed, looking for
work -
completely agree

% Unemployed, not looking for
work -
completely agree

I am very happy with life as it is

36%

34%

35%

Successful people have more money

17%

19%

21%

It is important my family thinks I am doing
well

43%

51%

41%

I feel very alone in the world

8%

11%

11%

I worry a lot about myself

31%

46%

26%

There is little I can do to change my life

10%

14%

13%

If I won the lottery, I would never work
again

16%

21%

20%

I look on the work I do as a career rather
than just a job

38%

33%

32%

I am perfectly happy with my standard of
living

27%

23%

27%

I am a workaholic

14%

13%

12%

Job security is more important to me than the
money

29%

31%

24%

I would rather have a boring job than no job
at all

44%

47%

42%

(source: TGI Latina)

In a perfect world, a person who wishes to earn
money by performing honest work should be given the opportunity to do so.
Nobody should have to suffer the indignities and injuries of unemployment.
Unfortunately, under neo-liberalism, full employment is in fact unacceptable
since there must be a reserve labor pool to ensure efficient and time allocation
of resources.